During a conversation at the Medellin leather and footwear exhibition in July last year with the now ex-president of the Ecuadorian footwear association, Calixto Peñaloza, the seriousness of the ‘contraband’ problem affecting the Andean countries became crystal clear when Peñaloza revealed that the estimated percentage of contraband shoes penetrating Colombia, Venezuela and Ecuador had reached just over 40% of total national demand.

The drug connection

Most of these shoes come from South East Asia, via the duty free zone of Panama and, in many cases, are the vehicle for laundering the vast amounts of drug money sloshing around in the local economies of the region. In the case of Colombia, containers of cheap shoes are purchased for cash in Panama, and are then either smuggled or legally imported to the Andean countries, thus producing ‘clean dollars’ for the drug lords and their cohorts when the shoes are sold at prices undercutting locally manufactured footwear.

Military involvement

The effect of this illicit activity is not hard to imagine. The connivance of the National Guard in these operations is the key to getting the containers out of the port and into the distribution chain.

The depth of the problem was illustrated during a conversation with Walter Richter of the Venezuelan shoe manufacturer, Rindal, who pointed out that in 1997 only 18% of all containers entering the Venezuelan economy paid the full amount of import duty. The rest of the money probably went to the ‘pension fund’ of the National Guard, according to Tino Mazzini, president of the Expocal footwear exhibition.

The contraband problem also rebounds on the tanneries and shoe component manufacturers who have seen their client base shrink from 650 potential clients in Venezuela in 1992 to around 230 ten years later. Despite the advantages of the NAFTA free trade agreement for the Mexican footwear manufacturers and measures taken by the Mexican government applying an import duty of 1100% on Chinese shoe imports, more than 500 factories have closed in this country since mid 2000, due to a combination of a slowdown in the US economy and the successful illegal imports of Chinese footwear via the US and Panama.

This phenomenon is not difficult to grasp when one bears in mind that the USA imports around 1.3 billion pairs of shoes per year from China – mainly private label manufacturing – some of which are diverted to Mexico using the NAFTA open border agreement as a shield to disguise the origin of these imports. For the time being, it looks as if the Mexican fiesta of huge exports to the USA is coming to an end, as the balance of trade in the footwear sector is gradually being reduced by the activities described above.

Forced closures

In 2001, the executive president of the Colombian association, ACICAM, Dr Gustavo Florez, launched an investigation into the sudden surge of cheap shoe imports into his country, which took the whole sector by surprise. Even in Ecuador, where labour costs are around US$70/month in the shoe industry, it has been impossible to compete with the contraband which has effectively triggered the closure of many smaller installations.

Luigi Pisella, vice president of the Venezuelan footwear association, Cavecal, pointed out that shoes were being offered at around US$2/pair to wholesalers which, when compared with the price of a polyurethane sole for his factory of US$3.5, illustrates the point that the industry is dying on its feet.

Falling on deaf ears

Almost every discourse on the Latin American shoe industry returns to the question of the ‘contraband problem’. With confidence at the lowest ebb in living memory, there is talk that the whole Venezuelan shoe sector could declare itself insolvent as a measure to pressurise the government to take steps against the endemic corruption in the ports.

Meetings with the government have proved completely fruitless in the past, as the outgoing president of the Venezuelan footwear association, Raimundo Moscato, explained: ‘In three years we had more then 200 meetings with government departments and ministers, and nothing has changed, they just did not want to listen.’

The future looks bleak

Brazil is the only country not to suffer from an import problem and even Argentina, despite the mind boggling financial problems being experienced by that country, is now competitive once again after the devaluation of its currency. Nevertheless, many observers here in Latin America fear that the entry of China into the WTO will eventually lead to a further influx of cheap footwear in the coming years, and many businessmen are at a loss of how the counter this threat, without recourse to import restrictions to protect their industry.

Ironically, any anti-competitive restrictions would be completely useless until the contraband problem has at least been brought under control. In the context of Latin America, even this solution seems to be a long way off since the ‘culture of corruption’ runs so deep that it may take a generational paradigm shift in basic values to correct this.